Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTSep 03, 2025

Those are the 2 big ones. Long bonds in the US, and now globally, start to blow out. Bonds at 2-decade highs are causing some jitters. He was at a dinner last week, and the talk was all about how can both rates and markets keep moving higher?So that's the #1 focus for investors.

Oil keeps getting pushed out. The war in Iran signals that it's winding down, and then it ramps back up. 

Definitely a bit of investor fatigue out there the higher these two numbers go. It puts a lid on certain sectors of the market.

We're just 1-2 years into the enterprise adoption of AI -- big corporations that have entrenched IT systems starting to use AI for productivity. Also seen deflation on the token cost (actual cost to run an AI model). Output is also much higher quality.

Seeing some deflation, particularly if you look at employment and wages. Very slow wage growth in the midst of cyclical factors (inflation, data centres, oil) that are pushing inflation. Structural inflationary forces on the other hand (wage growth, shelter, and housing), are starting to slow down. That supports a more moderate inflation outlook.

Not sure how much of a factor US midterms will be. Movement towards the Democrats might handcuff the Republicans on some parts of their agenda. It won't really change anything over the next 2 years, broadly speaking.

It really comes back to inflation and the price of oil. The last time we saw long bonds act the way they are, we did eventually see some stress in the US banking sector. There's a very supportive movement to lower capital and reserve levels across the financial system in the Western world, so the stress might not appear. But as a rule of thumb, rates can go only so high before something in the financial system starts to bend, if not break.

So we might see some more volatility. Until we don't. ;)

All manias die. This is a mania, and a whopper. We haven't cleared the system of the last spate of mania that was the massive government spending through Covid, which people took and bought extremely aggressive stocks. Then the Fed tightened credit in 2022, and those people got slaughtered.

Usually when people get hit like that, if it doesn't last too long (just a year as opposed to 2-3), then people's memories aren't very good. So people have come back.

This particular mania is following on all the excitement of meme trades and growth stocks. Now here we are with a very justifiable investment boom in AI. But when everyone wants something, that's the time to stay away.

When it comes to futuristic-oriented things, there's an early stage of excitement. People see all the money that's "supposedly" being made, but the accounting starts getting really rough.

What's going on now is that the big hyperscaler companies, who were massive free cashflow generators and never borrowed money, are now reversing and are negative FCF. Investors always loved that they had wide moats with high FCF. But now they're giving that up to secure their AI participation. Investors are ignoring that in hopes that there's a reward at the end of the rainbow.

Watch the way the hyperscalers are borrowing. The sketchiness of the whole thing is that they're not using A-rated, 20-year bonds to do this. They're doing it off-balance sheet or through circular financing.

In 1999 Lucent Technologies loaned $$ to their startup customers, and counted repayment as 45% of their revenue that year. And we know how that ended.

We're already in that phase.

Doesn't do any short-term trading. Owns 27 stocks in his US fund, and 27 in the international one. There's a set of circumstances that his team looks for, if not a particular price.

If things are going really badly, and we're in a big recession, nobody wants to touch stocks, and investors are scared, that's when they apply their criteria for stock selection. It takes a terrible market to create bargains out of wonderful companies, you have to be patient.

His team sincerely believes that we're 6 years into 15-30 years of a relatively golden era where oil & gas companies outperform the rest of the stock market and the rest of the economy. On May 1, 2020 (when the Saudis took the price of  oil to zero), that was like the bottom of the Great Depression or the Financial Crisis. Now we're reverting to the mean. 

From 2017 to 2021, political/religious movement related to fossil fuels. People were shamed from investing in fossil fuels. During that time, no one poked any holes in the ground or put capital to work. The antithesis of "drill, baby, drill". 

Likes the sector. For example, he owns ULTA and CROX. Likes good retail. Addicted customers are always a wonderful thing. 

He no longer owns SBUX, but it was one of his firm's first big wins. The US was in a deep recession for a long time after 2008, and everyone told him, "Bill, no one's going to buy a $4 cup of coffee." But it was the only luxury people kept. They weren't taking vacations or doing anything fun, but that little luxury kept people going.

"On sale" in his books means according to his metrics, not just "down from where it was". A lot of things are overpriced, and then they go down quite a bit, but they're still overpriced. Just because something's pulled back, doesn't necessarily mean it's a good idea to buy it.

His team believes that a lot of $$ is going to be made over the next 10 years building house in the US. The level of building right now, for the population, is not keeping up. The situation won't be cured until the AI mania breaks; that demand for credit is creating upward pressure on mortgage rates. 

The next bear market in the S&P 500 is probably going to be a doozy, and more than a year (like 1973-74 or 2007-2009). When that happens, the primary investors (50- to 80-year-olds) will flee to safety, and they'll flee to interest-bearing instruments. They'll take the bird in the hand and give up the two in the bush. (Right now, it's the 8 in the bush :) The bird in the hand doesn't have anything.)

We're not going back to 1-2%, that was just a bit of Covid-induced despair. But rates will, eventually, be lower.

Sentiment among the homebuilders is at very low levels.

His team has 8 criteria to select stocks.

A bargain to its intrinsic value. For different industries (whether growth or traditional value), that "bargain" will look different. Wide moat. Long history of success. High and consistent free cashflow. Strong insider ownership with recent purchases. Strong balance sheet (though he'd give up some of that temporarily, while strong FCF repairs the balance sheet).

It's tough to meet all those requirements. They find about 3 good ideas each year. You can look at his website.

They're constantly looking for companies that meet their criteria, then patiently wait for them to get thrown in the dumpster (many times by circumstances that don't have anything to do with them). One example is UNH.

They tend to leg in to positions. A full position is, typically, 3%.

Out of 2008-2009, his team came out with "broken growth stocks" -- DIS, SBUX, AMGN. Growth stocks that were formerly highly thought of, but trading at low double-digit PE multiples.

It's not helpful for the price of money to go up abruptly the way it has. It slows down lending, might increase cost of deposits if people are tempted to move money into GICs. That all hurts margins.

When the S&P starts doing poorly, people will probably flock to those 6% bonds. That will cause interest rates to go down, which would actually help housing and lumber stocks.

In August he raised the hedge to 65%, then lowered it in mid-September then raised it late last week due to volatility. His stock portfolios has been stable, skewed to AI data centres. In this space, the big companies have done well, but the medium/small ones have not. So, the market breadth is weak, even within AI infrastructure. Also, taking Meta's Muse for example, AI has been focused less on business and more on the consumer.

A 25-point hike won't impact the big guys, but it certainly will impact the small/medium ones.